I'm about to do a complete 180 on a sector / BURP! Excuse me

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Yesterday I talked about how if John McCain is elected president there is a good chance that the government would pull the plug on ethanol subsidities (Obama on the other hand is in bed with ethanol companies, which are major contributors to his campaign). They are running neck and neck in the polls right now, so it's a coin toss as to who will be elected. If you are a betting man, or woman, you may want to put your money (or CAPS points) down on meat producers.

I have hated this sector for a long time and have made money by shorting companies like Sanderson Farms (SAFM) and Pilgrim's Price (PPC) both in CAPS and in real life. The margins have been so compressed that meat processing still stinks as a business, but these companies have been so beaten down that I am about to do a complete 180 and thumbs up several companies in the sector.

If McCain is elected and he pulls the plug on ethanol subsidities, the price of corn would instantly drop by more than a dollar. Meat processors would benefit tremendously from this drop in input costs.

Let's take a look at why these companies have been so demolished. When the price of grains skyrocketed I predicted that meat producers would cut production and the price of meat would soar, but the sharp rise in the price of meat that I was looking for never really materialized. When the world saw a similar spoke in grain prices in the 1970s meat producers eventually cut production and a lagged rise in the meat prices occurred. Why didn't the same thing happen this time? One word answer: Wal-Mart.

I'm sure that you are thinking, what in the heck does Wal-Mart have to do with this. Well, I'll tell you. Large grocery retailers, like Wal-Mart, do such tremendous volume that they have lots of power to put pressure on meat producers to cut prices. A passage in the well-written and much less sensational than I expected book that I am now reading, End of Food, provides an amazing description of what has happened to this sector:

"To meet retailers' price requirements, producers have scaled up their operations in order to spread out their costs over the largest possible number of units. Yet because these new production facilities are so large and so costly to build (the typical high-speed hog plant goes for $100 million), and because the profit margin per animal is so narrow, these operations must be run at full capacity continuously to provide a sufficient return on the enormous investment. Overproduction is, in effect, financially embedded in the system."

I still don't like meat producers as a sector, but these companies are so beaten down at this point that if ethanol subsidities end they are poised for a HUGE bounce. I am going to try to give the thumbs up to Sanderson Farms, Pilgrims Pride, and Tyson (TSN) today.

While I can't really think of any practical investing application for this information, it is interesting.

Earlier this week, the head of the U.N.'s Nobel Prize–winning Intergovernmental Panel on Climate Change urged people reduce their consumption of meat in an effort to fight global warming.

A 2006 study by the U.N. Food and Agriculture Organization concluded that deforestation, nitrous oxide emitting manure, and flatulence caused by global livestock farming are responsible for 18% of the world's greenhouse gas emissions. This compares with only 13% for all of the boats, cars, airplanes, and trains in the world combined.